rp-03-32.pdf

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Rev. Proc. 2003-32

SECTION 1. PURPOSE

This revenue procedure describes conditions under which a regulated investment
company (RIC) that holds a partnership interest is treated, for purposes of qualifying as a
RIC under ' 851(b)(3) of the Internal Revenue Code of 1986 and for purposes of
eligibility to pay exempt-interest dividends under ' 852(b)(5), as if it directly invested in
the assets held by the partnership.

SECTION 2. BACKGROUND

.01 Certain RICs seek investments with a yield that is treated for federal income tax
purposes as interest exempt from tax under ' 103 and that reflects current short-term
exempt interest rates. Partnerships described in Rev. Proc. 2002-68, 2002-43 I.R.B. 753,
modifying and superseding Rev. Proc. 2002-16, 2002-9, I.R.B. 572, offer these
advantages to some of their partners. The partnership interests are referred to as synthetic
tax-exempt variable-rate bonds. Eligible partnerships described in Rev. Proc. 2002-68
may elect a monthly closing election that permits consenting partners to take into account
their distributive shares of partnership income on a monthly basis.

.02 Partners in eligible partnerships described in Rev. Proc. 2002-68 that are RICs must
qualify as RICs under ' 851(b)(3) and generally also seek to qualify to pay exempt-
interest dividends under ' 852(b)(5).

.03 Section 851(b)(3)(A) requires that, in order for a corporation to qualify as a RIC, at
the close of each quarter of the taxable year, at least 50 percent of the value of the
corporation's total assets must be represented by cash and cash items (including
receivables), Government securities, securities of other RICs, and other securities
generally limited in respect of any one issuer to an amount not greater in value than 5
percent of the value of the total assets of the corporation and to not more than 10 percent
of the outstanding voting securities of such issuer.

.04 Section 851(b)(3)(B) provides that, in order for a corporation to qualify as a RIC, not
more than 25 percent of the corporation's total assets may be invested in the securities
(other than Government securities and the securities of other RICs) of any one issuer, or
of two or more issuers that the corporation controls and that are determined, under
regulations, to be engaged in the same or similar trades or businesses or related trades or
businesses.

.05 Section 852(b)(5) provides that, if at least 50 percent of the value (as defined in '
851(c)(4)) of a RIC=s total assets at the close of each calendar quarter consists of
obligations described in ' 103(a), the RIC is eligible to pay exempt-interest dividends,

which are treated by the RIC's shareholders as interest excludable from gross income
under ' 103(a).

SECTION 3. SCOPE
This revenue procedure applies to RICs that are consenting partners in eligible
partnerships described in Rev. Proc. 2002-68.

SECTION 4. PROCEDURE
For purposes of qualifying as a RIC under ' 851(b)(3), and for purposes of eligibility to
pay exempt-interest dividends under ' 852(b)(5), a RIC meeting the requirements of
Section 3 of this procedure is treated as if it directly invested in the assets held by the
eligible partnership. For these purposes, its interest in partnership assets is determined in
accordance with its capital interest in the partnership.

SECTION 5. EFFECTIVE DATE

This revenue procedure is effective for asset determinations that are made as of
dates that are on or after March 31, 2003.
SECTION 6. TRANSITION RULE

The Service will not challenge a RIC partner's tax treatment for purposes of an
asset determination, provided that—

(1) The asset determination is made as of a date that is in a taxable year beginning
before January 1, 2004;

(2) The partnership would be an eligible partnership as defined in Rev. Proc.
2002–68;

(3) The RIC partner's inclusion of income, gain, loss, deduction, and credits is
consistent with that permitted under that revenue procedure; and

(4) The RIC partner's tax treatment is consistent with an election under § 761(a)
to be excluded from the provisions of subchapter K.

DRAFTING INFORMATION

The principal author of this revenue procedure is Susan Thompson Baker of the Office of
the Associate Chief Counsel (Financial Institutions & Products). For further information
regarding this revenue procedure contact her at (202) 622-3940 (not a toll-free call).